New home sales: the final shoe in the housing sector has dropped

 

 - by New Deal democrat

In this month’s report on new home sales for July, the most important news was at the tail end, which I’ll get to last.

As per my usual intro, while new home sales are the most leading measure of the housing market, they are very noisy and heavily revised - which turned out to be important this month - and which is why I generally pay more attention to single family permits. Still, if averaged over three or more months they are valuable indicators of the underlying upward or downward pressure on the economy going forward one year or more. Further, as per usual, sales turn first, followed by prices and inventory, which is typically the last shoe to drop.

So let’s turn to each metric in order.

With mortgage rates remaining in the 6%-7% range, sales of both new and existing homes have also been rangebound for over two years. In July that continued to be the case, as new home sales declined -4,000 (from a June level upwardly revised by 29,000!) to 652,000, near the bottom of that range: 

After sales peaked, prices also stalled, and then began a very slow deflation on the order of -1% -5% YoY. That trend not only continued but amplified in July, as on a non-seasonally adjusted basis prices declined -$3,400 to $403,800 (gold, right scale in the graph below). More importantly, on a YoY basis prices declined -5.9%, the steepest such decline since last November (blue, left scale):

Recall that last week the median price for existing home sales was only up 0.2% YoY. Tomorrow we will get both the FHFA and Case Shiller repeat sales indexes, which also have shown recent, seasonally adjusted, declines. If that continues, it will be the steepest such retreat since the Great Recession’s housing bust.

But the most important news was at the tail end. Last month’s initial report indicated that the inventory of homes for sale had risen to 511,000, a new post-pandemic high.

Revisions made a major difference this month. The data now indicates that the inventory of new homes for sale in fact peaked in March at 504,000, with both May and June being revised down, the latter by -9.000 to 502,000. And this month inventory for sale was reported declining another -3,000 to 499,000:

Why is this so important? Because in the past recessions have happened after not just sales decline, but the inventory of new homes for sale (red, right scale) - which also consistently lag - also decline, as builders pull back:

To reiterate: in the typical housing cycle mortgage rates lead sales, which slightly lead permits and starts, which in turn lead prices and housing units under construction (gold in the graph below), which finally lead employment in residential construction (blue) and housing for sale (red):

For the record, I pay very little attention to months’ supply, becuase it depends on both units sold and for sale. There does not appear to be any “magic level” that serves as a turning point, and indeed, it frequently only turns down after a recession has begun, as homes for sale decline even more than homes sold:

So, the important conclusion is: all of the important sequence of metrics in the housing sector have now turned down. The final shoe has dropped. Now we pay more attention to short leading indicators like major durable goods purchases and initial jobless claims, for signs that the turn in the bigger economy is near.

Weekly Indicators for August 18 - 22 at Seeking Alpha

 

 - by New Deal democrat

My “Weekly Indicators” post is up at Seeking Alpha.

There were no big changes this week, but what continues to stick out in the data as far as I am concerned is just how strong consumer spending continues to be: weekly retail spending was up nearly 6% YoY, and restaurant reservations - a very easy thing to cut back if consumers feel pinched - are up 10%. That simply is not compatible with a big slowdown.

As usual, clicking over and reading will bring you up to the virtual moment as to the state of the economy, and bring me a penny or two in my pocket for organizing the data for you.

The rebalancing of the housing market continues, as existing home price increases have halted, and inventory finally exceeds 2020 levels

 

  - by New Deal democrat

The housing market, for all of its economic importance, tends to move as slow as molasses. This is especially true as to prices, where sellers are loathe to realize a loss, even when compared to hypothetical gains they could have had by selling earlier.

The pandemic, of course, through the entire market out of whack, since there was a period of time that it was for all intents and purposes shut down. It is only now rebalancing.

After the Fed began hiking rates in 2022, mortgage rates also rapidly rose from 3% to the 6%-7% range, where they have remained ever since. Since sales follow mortgage interest rates, existing home sales rapidly declined to 4.0 million annualized, and have remained in that range, generally +/-0.20 million for the past 3.5+ years:

In July, the rangebound behavior continued, with sales of 4.01 Million annualized (blue, right scale). Note that new home sales (gray, left scale) similarly declined and have similarly stabilized in the 625,000-725,000 annualized range.

The trend I have been looking for in the past several years is the rebalancing of the new and existing homes markets. Existing home inventory has been removed from the market for over 10 years (likely due in part to absentee rental owners buying increasing chunks of inventory), and really accelerated during the pandemic. This caused an acute shortage of houses for sale, which in turn led to bidding wars among buyers and a spike in prices.

A rebalancing of the market more than anything would require an increase in inventory at least to pre-COVID levels, and a deceleration of price increases, or even outright decreases. Which means that the level of sales themselves was far less important than what the median price for an existing home and inventory are telling us about the ongoing rebalancing of the housing market.

The secular decline in inventory reached a nadir in 2022. This series is not seasonally adjusted, so it must be looked at YoY. In July inventory increased by only 1,000, but more importantly, inventory finally exceeded its 2020 level for the same month, up 5,000:

Still, pre-2020, inventory was typically in the 1.7 million to 1.9 million range, which means that although it is lessening the chronic shortage still exists.

But even more important is what happened, and has continued to happen, with prices. As shown in the below graph, the average price of a new home (gray, left scale, not seasonally adjusted) rose almost 40% between June 2019 and June 2022 before slowly declining about -7% through June 2025. Meanwhile, the average price of an existing home (blue, right scale, not seasonally adjusted) rose about 45% between July 2019 and July 2022 and another 5% through July of this year, as was reported yesterday:

With seasonal adjustments are not made, my rule of thumb is that a peak (or trough) occurs when the YoY% change is less than half of its maximum change in the past 12 months. Here are the comparisons in the past 12 months:

July 4.2%

August 3.1%

September 2.9%

October 4.0%

November 4.7%

December 6.0%

January 4.8%

February 3.6%

March 2.7%

April 1.8%

May 1.3%

June 2.0%

As of yesterday’s report for July, the YoY% change in average prices was only 0.2% higher than one year ago.

Last month I concluded with “I still expect moderation in price increases and more importantly, for inventories finally to exceed their 2020 levels.”

This month, both happened. Inventory finally exceeded 2020 levels, and further, it is safe to say that if we had seasonally adjusted measurements, we could conclude that prices for existing homes peaked sometime this spring, and have started to decline.

Even so, prices of existing homes are still up about 50% from 2019 levels, vs. new single family homes, which are up less than 30%. Which means that while the July existing home sales report confirmed the ongoing rebalancing of the market, there is still some distance to go.

Jobless claims suggest our recent good news has been more unresolved seasonal quirks

 

 - by New Deal democrat

Initial jobless claims have been plagued by apparent unresolved seasonality in the past several years, post-pandemic. I suspect that is still playing out, as evidenced by the past few weeks of claims.

Initial claims rose 11,000 to 235,000 last week, a seven week high. The four week moving average rose 4,500 to 226,250, the highest in four week. Meanwhile, with the usual one week delay, continuing claims rose 30,000 to 1.972 million, the highest since early November of 2021:

Last week I speculated that the steep decline in initial claims in July might have been due to seasonality issues around layoffs in the education sector, or might be a side effect of large scale deportation raids in some sectors. This week’s report makes me think it is more likely the former than the latter.

To show you why, here is the four week seasonally adjusted average since spring 2022 (blue), together with non-seasonally adjusted initial claims, averaged biweekly (red):

On a non-seasonally adjusted basis, initial claims always peak in January after the Holiday season, with a secondary peak when the school year ends in June. They make their lows around Labor Day, as the new school year begins. In the last several years, the seasonal adjustment has given us low readings in January (i.e., fewer layoffs than was usually the case pre-pandemic), but elevated readings in June and early July at the end of the school year, gradually declining through autumn.

This year the June employment report strongly suggested that end of school year layoffs were slightly askew compared with the last several years. Comparing the SA and NSA readings in the past several months suggests that has affected initial claims as well, with markedly fewer claims at the early July peak. But whereas NSA claims continued to decline through August last year, for the past three weeks this year they have held steady.

We’ll see if that continues to be the case in the next few weeks.

Returning to our regularly scheduled analysis, here are the YoY% changes that are more important for forecasting purposes. Initial claims were 1.3% higher than one year ago, while the four week average was down -3.9%. Continuing claims were higher by 6.1%:

This suggests that layoffs remain subdued, while hiring has seriously slowed down, but not enough to suggest that a recession is close at hand.

Finally, we’re far enough along in the month to take a look at the implications for the unemployment rate. The below graph looks at all three metrics by YoY% change:

This suggests that the the unemployment rate will remain very close to its 4.1%-4.2% of one year ago.

Real nonsupervisory payrolls and income in danger of tariff-driven stagnation

 

 - by New Deal democrat

Let’s take a look at the “real” purchasing power of average working and middle class Americans.

The July jobs report showed that average hourly earnings for nonsupervisory workers rose a little under 0.3% (blue in the graph below). Consumer inflation (red) rose 0.2%, so “real” average hourly earnings rose 0.1%. The below graph is the monthly changes in each over the last 24 months, showing that nominal monthly wage gains have slowly decelerated from over 0.3% to about 0.25%, while inflation, with the exception of a few months, was somnolent during 2024 and the first few months of 2025:

The net result is that real average hourly wages for nonsupervisory employees have risen on trend through last month:

Here is the nominal YoY% change in each, showing the slow deceleration of nominal wage gains, along with - until recently - the similar slow deceleration in consumer inflation, driven mainly by slowing real and fictitious rent appreciation:

The danger going forward, obviously, is if tariff-driven inflation picks up, while wage gains continue to decelerate.

For the economy as a whole, the more important metric is real aggregate nonsupervisory payrolls. Last month these jumped by 0.6% nominally, translating into a 0.3% growth in real terms. Thus in absolute terms (blue, right scale) real aggregate nonsupervisory payrolls set a new record, although the pace of improvement has slowed to only a 0.3% gain in the past four months. On a YoY% basis (red, left scale) they are up 2.2%:

To repeat, with almost 100% reliability, a peak in real aggregate nonsupervisory payrolls has preceded recessions in the past 50+ years by a few months. This suggests that no recession is likely in the next few months, although there is the same danger of slowing aggregate payroll growth and accelerating tariff-driven inflation.

Finally, let me update a metric I haven’t noted in awhile, but which showed up as the source for the Oval Office press conference last week in which T—-p touted his “real” economy: namely, the monthly real median household income compilation by Motio Research.

 

This group picked up the torch after Sentier Research discontinued the series. In the graph below, I show the data from 2017 to the present:

T—-p used the series to show how real median household income had increased strongly during his first term (true, until Covid) and stagnated during Biden’s term (true for the first two years, but it rose 2% during the last two years). 

He also showed a graph beginning in January or February of this year, also showing a big increase. This was very misleading. Through May, real median household income hadn’t grown at all this year, and was actually *down* -0.1% since last September. The entirety of the increase came in June, when real median income increased 0.3% in one month (Motio hasn’t updated July yet).

Since the June increase could be one noisy month, the overall trend for the past 9 months has been stagnation in real median household income. Yet another reason to be very concerned if tariffs hit consumer finances harder.